MFRS137 Provision, Contingent Liability and Contingent Asset

Class Activity

(a) BA210 Berhad assembles and sells forklifts. In the current financial year ended 31
December 2020, the following independent events happened to the company:

(i) The company gives warranty to replace free of charge any defective parts of
the truck during the warranty period of 3 years.
(ii) Additionally, the company sells parts to retailers. These products are sold
without any guarantee for product quality. However, the company has a policy
of refunding purchases by dissatisfied customers, even though it is under no
law to do so. Its policy of making refunds is generally known and it has in the
past honoured such refunds.
Required:
Explain with reasons whether a provision is to be made in each of the above cases according to
MFRS137 Provision, Contingent Liability and Contingent Asset.

Answer
Reasons for making provision for contingent liabilities:
1 There is a present obligation as a result of past obligating event. The past event is the sale
of the product with 3-years warranty. Thus, as a legal obligation, a provision should be
recognized.
2 Due to the company’s purchase refund policy, the event can be categorized as the sale of a
product that gives rise to a constructive obligation. Therefore, a provision should be
recognized.

MFRS137 Provision, Contingent Liability and Contingent Asset

Question and Suggested solutions
1 A retailer gives “money-back’ guarantee at the time of sale to purchasers of its product.
Under the terms of the sale, the retailer undertakes to refund the full amount to a purchaser
who is not satisfied with the product and return it to the retailer within a one year from the
date of sale. Based on past experience, it is probable that there will be some purchasers who
will return the goods sold to them.
2 A retailer sells good without any guarantee for product quality. However, it has a policy of
refunding purchases by dissatisfied customers, even though it is under no law to do so. Its
policy of making refunds is generally known and it has in the past honoured such refunds.

Required:
Explain with reasons whether a provision is to be made in each of the above cases
according to MFRS137 Provision, Contingent Liability and Contingent Asset.

Suggested solution
1 There is a present obligation as a result of past obligating event. The past event is the
sale of the product with the money-back guarantee which is a legal obligation.
 Therefore, a provision should be recognized.
2 The event is the sale of the product which gives rise to a constructive obligation.
Therefore, a provision should be recognized.